The Reserve Bank of Australia (RBA) has opted to keep its cash rate unchanged, betting that rate hikes since May 2022 have curbed enough excess demand to send inflation downward. However, if the RBA’s wager is incorrect, it could hurt the economy if consumers and businesses figure that borrowing costs have peaked and begin piling back into the market. The sentiment shift could slow or even reverse inflation’s slide towards the 2%-3% range that the RBA is targeting over time, as overseas experience suggests a slowing pace of price increases cannot be taken for granted.
Australia started lifting interest rates only in May 2022, much later than most overseas counterparts. The RBA became the first major central bank to reduce the size of rate increases in October, halving them to 25 basis points. With Tuesday’s pause, Australia joins Canada as one of the first nations to halt the hikes. At 3.6%, the RBA’s official cash rate is relatively low in nominal terms.
RBA Governor Philip Lowe will likely explain the board’s reasons for pausing at the National Press Club on Wednesday. However, given Lowe’s recent performance, journalists may ask why the public should have confidence that he has picked the right time to pause. Lowe has already conceded that he was wrong to say the RBA’s cash rate could remain at its record low of 0.1% until 2024. As late as November 2021, he was still saying that the economy and inflation would have to turn out very differently for the board to consider any increase in interest rates in 2022, even as other nations were moving.
Many economists predict that RBA rates haven’t peaked. The ANZ’s senior economist, Felicity Emmett, said, “We continue to think inflation will prove persistent enough to require the RBA to tighten monetary policy further in the months ahead. In our view, the question is not so much one of ‘where’ the RBA gets to – we still favour 4.1% as the terminal rate – but ‘when’ it gets there.” Therefore, the borrowers’ relief at Tuesday’s pause may prove to be temporary.
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